Create a displacement map from high-res terrain to use on low-poly terrain
Alright it took me some time but I figured it out.


The end result will look better if we use plane instead of a low poly version of the terrain. 

A. messed up version


B.Replace the low poly version with simple plane (keep it in the same place though)






So, with the plane selected, move the plane below the high poly version.







Select the plane and assign a material to it, the default material will do. Next go to the texture tab and create an image. Change the resolution to something you want. Also enable 32 bit float for precise displacement.









Next up, unwrap the plane (edit mode > top view > unwrap > project from view (bounds)). Make sure in the uv window you select the displacement







Next up, bake settings. Make sure you're using Blender Internal, not Cycles. Set the Bake mode to Displacement. Enable Selected to Active and set the distance to the distance between the plane and the highest point of the high poly mesh ( I just eyeballed it), 0.300 in my case.






Final Result